Judge rejects Facebook $20M offer in ad lawsuit

Judge expresses concerns over how amount was reached, Facebook allowed to modify proposal

Facebook took a pretty big hit this week, dropping to a new low at half its IPO price. And then on Friday, the social networking site took another hit when a federal judge rejected its offer to end a class action lawsuit over how the company handled its users privacy.

On Friday, a U.S. District Judge threw out Facebook’s $20 million settlement to settle a lawsuit over the company’s Sponsored Stories, in which users, who “like” a certain brand on the site, are then used to endorse that brand, sometimes without the user’s consent, in some cases without their knowledge.

Here’s how it works: if a user clicks the “like” button on the McDonald’s page, the user’s name and images can be used in advertisements sent to their Facebook friends. Facebook is paid by McDonalds for the service.

The suit was brought by five Facebook members, and upwards of 70 million members will be able to join in the class action suit.

The settlement that Facebook was proposing would have allowed users to have more control over their personal information, and would have allowed users under the age of 18 to opt out entirely.

Facebook would also have paid $10 million to organizations involved with Internet privacy, and the plaintiffs in the case would have been allowed to apply for an attorney fee of up to $10 million.

U.S. District Judge Richard Seeborg cited numerous problems with the settlement, however, and rejected the offer.

Though these kinds of settlements are usually approved rather quickly, “in this instance there are sufficient questions regarding the proposed settlement that it would not be appropriate simply to grant the motion and postpone resolution of those issues to final approval,” Seeborg wrote in his ruling.

Seeborg said he had “serious concerns with the provision of the settlement agreement permitting plaintiffs to apply for up to $10 million in attorney fees without objection by Facebook,” Seeborg wrote.

Though he noted that it was probably impractical for Facebook to make payouts to so many people, (“even paying each class member the modest sum of $10, might require a settlement fund of $1 billion (assuming a class size of 100 million), apart from administration costs”) Seeborg expressed concern over the size of the payout and how it was decided.

Saying that the attorneys for the plaintiff class may “have bargained away something of value to the class,” the Judge demanded assurances that the amount “was not merely plucked from thin air.”

Seeborg also noted that the part of the settlement that allows users to decide whether or not they want their information to be used in advertisements, does not provide the users any economic benefit.

“Under the injunctive provisions of the settlement, a member will have the choice of either continuing to allow his or her name and likeness to be used without monetary compensation (in which case Facebook will presumably still derive revenue from it), or of preventing Facebook from using his or her name and likeness (in which case Facebook will not derive the revenue). In neither instance will the Facebook member receive any clear or direct economic benefit.”

Though the offer was rejected, Facebook will be allowed to modify the settlement proposal to address these concerns.

"We continue to believe the settlement is fair, reasonable, and adequate.  We appreciate the court’s guidance and look forward to addressing the questions raised in the order.  We are confident we can address the issues raised by the court without substantially revising the settlement,” a Facebook spokesperson told VatorNews.

Read the judge's ruling below:

Facebook Sponsored Stories Rejected

(Image source: foxnews.com)